GAS WARS: CRONY CAPITALISM AND THE AMBANIS
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Sarma said that although the Rangarajan Committee was ‘fully seized’ of this aspect of gas prices, it nevertheless chose to rely on prices prevailing at regional trading ‘hubs’—the Henry Hub in the US, the National Balancing Point (NBP) hub in the UK and the ‘net-back’ wellhead prices of LNG imports in India and Japan. Those familiar with gas trade patterns know that spot-transacted prices could be as low as half of the hub prices in a given region, he wrote. When producers vie with one another to sell their gas, a prudent buyer can negotiate a price that lies somewhere between the hub price and the spot price. The ‘net-back’ prices, derived by subtracting the costs of liquefaction and transportation from the delivered prices, can be equally misleading, he added. The Rangarajan Committee had recommended a two-step approach to determine the domestic gas price. First, it envisaged working out a weighted average of the previous 12-month averages of prices indicated by the Henry Hub and NBP, and LNG imports made by Japan. The second step was to average this (not a weighted average this time) with the previous 12-month average of the price of LNG imports made by India. ‘Averaging out prices applicable to fragmented markets with their own dissimilar supply-demand characteristics does not make much economic sense,’ argued Sarma.
He further pointed out that since there had been complaints about LNG imports from Qatar being ‘overcharged’, the Rangarajan Committee’s formula would capture whatever distortions that existed. ‘It amounts to perpetuating a mistake once committed,’ Sarma argued in the EPW. Moreover, averaging two numbers, one derived from a complex weighted average of three regional market prices and the second, a number derived from a few lines of Indian LNG imports, made little statistical sense, he commented. In North America, the price of gas touched a low of $2 per mBtu in 2012 and temporarily recovered to $4 per mBtu. Higher availability of shale gas in the US, Canada and China had started exerting a downward pressure on gas prices all over the world. ‘In such a scenario, to rely exclusively on the hub prices and calling it, as the CCEA has done, the basis for “competitive, arm’s length price, to the benefit of parties to the contract” as envisaged in the PSC, would be grossly erroneous,’ he stated categorically.
Sarma, who spent much of his working life as a bureaucrat, found it truly amazing that even as global gas markets were looking downwards, India’s ‘gas policy analysts seem to be looking upwards!’ He point out that the PSC mandated that the gas price formula be approved by the government. But the question arose as to whether the formula reflected the state of competitiveness in the market and was it mutually beneficial for both the contracting parties. In a perfectly competitive market, the producer’s price will be no more than an efficiency-based unit cost plus a reasonable rate of return. If no competition exists, an independent regulator should necessarily determine such an efficiency-based price. There can be no intermediate solution, Sarma asserted.
He said that had the government entrusted the responsibility of fixing the contractual ‘competitive, arm’s length price’ to an independent statutory regulator, the process of price determination would have been transparent, making available an opportunity for the aggrieved parties to seek judicial remedies. By arrogating to itself this onerous responsibility, the Indian government had introduced an ‘undesirable political dimension’ into the process of price fixation. Sarma then asked the key question. What was the actual cost of extracting gas from the KG basin. He claimed ‘knowledgeable sources’ had told him that this amount was below $1 per mBtu! The closest the government came to a price discovery was, when in 2006, RIL had proposed a price of $2.34 per mBtu for KG-D6 gas which was the price at which RIL had agreed to supply gas to RNRL. Documentation in the Rangarajan Committee’s report bore out the fact that this price was rejected by the government on the ground that it was not derived on the basis of competitive arm’s length sales in the region for similar sales under similar conditions. Yet, this was the same price at which RIL had bid to supply gas to the NTPC. Sarma alleged that NTPC was placed ‘under duress’ and ‘was not allowed to accept’ the price of $2.34 per mBtu. In 2009, the EGoM headed by Pranab Mukherjee fixed the price at $4.20 per mBtu, ignoring the ‘clear price signals’ from RIL based on its contract with RNRL and its subsequent bid to supply gas to NTPC. Sarma argued that the price of gas was fixed at that time on the basis of bids obtained by the producer from a few power companies which had no incentive to quote a lower price, ‘as they knew that whatever price they had quoted would anyway be allowed to be passed through in the open ended cost-plus regime of electricity regulation’. Thus, he claimed that the government knowingly passed on ‘largesse’ of $1.86 per mBtu to the producer (RIL) at the expense of electricity and fertiliser consumers.
Sarma reiterated his contention that it was ‘improper’ that an EGoM, a political entity, fixed the price of gas. Since the natural gas market lacks homogeneity, an ‘independent, professional, quasi-judicial regulator’ should have been appointed to ‘compute efficiency based costs and determine the price on the basis of a reasonable return’. By allowing the contractor to violate certain provisions in the PSC, he felt that ‘the government has conveyed an inappropriate message to all prospective investors that they could mock at the sanctity of contracts and the law of the land’. Sarma said the government should not have extended the new gas price to already-developed gas fields in the KG basin and elsewhere. Finally, he re-emphasised the point that natural gas was, after all, a public resource and the government is merely a trustee of resources that belong to the people. His conclusion: the government had not adhered to the doctrine of public trust that obliges it to ensure that gas resources are developed in a scientifically sound manner and social returns from it, maximised. The gas price hikes of 2009 and 2013 smacked of crony capitalism and political expediency, asserted Sarma, now a full-time activist.
12
MOILY BRAZENS IT OUT
On 10 July 2013, most major newspapers prominently carried articles based on a letter written by an official in the ministry of finance to another bureaucrat in the ministry of petroleum and natural gas asking the latter to consider ‘placing a cap’ on the increase in the domestic price of gas after the pricing formula approved by the Cabinet Committee on Economic Affairs (CCEA) on 27 June comes into effect from 1 April 2014. Interestingly, all the news agencies and publications that put out the story attributed the story to an unidentified senior official in North Block where the finance ministry is headquartered. Together with this letter dated 4 July, ministry officials had attached editorials published on 29 June in various newspapers, including the Hindu, that were critical of the government’s decision to double the administered price of natural gas. The letter from the finance ministry’s department of expenditure read: ‘There must be a ceiling price under the formula. It cannot be that gas producers will reap unlimited gains in the case of an upswing in global prices; any upside has to be capped.’
Even more interestingly, this letter from the finance ministry not only described Reliance as the biggest beneficiary of the gas price hike—contrary to what petroleum minister Moily had claimed—but also urged the petroleum ministry to examine whether it would be possible to ensure that RIL delivered its current supply shortfall at the old price of $4.2 per million British thermal units (mBtu) after the ‘technical difficulty’ (presumably referring to the geological complexities that the company claimed was responsible for the lowering of gas output) was overcome. In other words, the finance ministry argued that RIL should not get the benefit of the new price of gas until it was able to compensate for the loss of gas output—against a promised 80 mscmd of gas, the company was producing 15 mscmd. A portion of the finance ministry’s letter read: ‘The ongoing issues with Reliance, which will benefit the most from the higher prices now, over cost recovery and penalties for not meeting contracted output levels need to be taken to their logical conclusion.’
Reacting to the news, RIL’s stock price fell by nearly 4 per cent on the stock exchange at Mumbai before recoverin
g to close the trading session almost two per cent lower. Many presumed that the finance ministry’s letter was issued with the full knowledge and consent of finance minister Chidambaram, as an attempt by the government to backtrack and convey an impression to its critics that it was not going out of the way to help Reliance. For instance, Business Standard wondered if the suggestion on RIL ‘could have come because about 25 power plants are running short of gas due to a decline in the company’s production from its KG-D6 field to 15 mscmd, compared with a target of 80 mscmd’ and peak production of 61 mscmd in 2010. The allocation of gas for the power sector from KG-D6, which was supposed to be 29.7 mscmd, had fallen to zero, the newspaper pointed out.
On the day the contents of the finance ministry’s letter were disclosed, journalists approached petroleum ministry officials who claimed in off-the-record statements that there was no question of ‘going back’ on a decision already taken by the Cabinet or that a new ‘dual pricing’ formula was needed, one for ‘old’ gas and another for ‘new’ gas. Sure enough, the following day, that is, on 11 July, petroleum minister Moily called a media conference and cleared all doubts in this regard. He categorically stated that the decision to double natural gas price would remain unchanged despite the finance ministry ‘seeking a dialogue’ on the idea of maintaining the old gas price of $4.2 per mBtu for some of the gas that Reliance Industries would produce after 1 April when the new administered price of gas becomes applicable. The minister asserted that there was ‘no question’ of placing a ceiling on the domestic price of gas in case global gas prices shoot up. Moily said he was very clear that the decision on gas pricing was not up for a review.
‘There is no thinking on part of the government for any review or reconsideration of the decision of the CCEA. Let me make it very clear—there is no confusion, there is no vagueness. And I don’t think there is scope for any interpretation whatsoever,’ Moily said at the news conference, adding;
The office memorandum dated 4 July from the department of expenditure, ministry of finance... has enclosed two editorials of the newspapers and illustrated some of the issues in these editorials. That cannot be taken as the objective opinion of the ministry of finance. It cannot (also) be considered as a query raised by the ministry of finance.
That day, Moily told reporters that Iraq, India’s second-largest crude oil supplier after Saudi Arabia, had offered to give state-owned Indian firms three discovered oil blocks in the Middle Furat oilfields on nomination basis. The minister, who had returned from Baghdad after attending the Indo-Iraq Joint Commission Meeting, said ‘the fields are discovered and work can immediately start’. He said this was the first time in recent years that an oil-rich country from the Persian Gulf region had offered fields to Indian government companies on a ‘nomination basis’. In the past, Iraq and other countries had asked Indian companies to participate in international competitive bidding to obtain rights to operate oilfields.
On the face of it, having faced a lot of flak, it was as if Moily was trying to impress journalists with his recent achievements as petroleum minister. In actuality, this was the beginning of a series of events, which culminated with the ‘realignment of portfolios of bureaucrats’ within the petroleum ministry. This in effect meant the divestment of the gas pricing portfolio from joint secretary (exploration) Giridhar Aramane, an Indian Administrative Service (IAS) officer of the Andhra Pradesh cadre. According to the Hindu (13 August 2013), the officer was relieved of the ‘charge of gas pricing, acquisition of E&P (exploration and production) assets abroad, all establishment and administrative matters related to ...(ONGC Videsh) and unconventional hydrocarbons’ through a note signed on 6 August by Veerappa Moily. Aramane was left with the exploration portfolio, his other charges being handed over to the joint secretary, international cooperation and gas pricing, P.K. Singh. The gas pricing on NELP blocks such as RIL’s KG D-6 block was with Aramane, who had held this portfolio from the period when Jaipal Reddy was petroleum minister. Thus, Moily had the perfect cover for his argument that this realignment was about lessening the officer’s burden (PTI, 5 August 2013). The national news agency reported how the petroleum minister ‘temporarily’ held back the transfer on account of a ‘rethink’ since the ministry had to ‘file an affidavit in Supreme Court on a petition challenging the 27 June decision of the Cabinet to raise gas prices’. With Aramane having piloted the move, it was decided that the function remained with him, ‘at least’ till the affidavit was filed, which had to be done by 6 September. Petroleum secretary Vivek Rae, on his part, had stood by the officer which reportedly ‘infuriated Moily’ as he had returned the file to the minister ‘saying the new person who would handle gas pricing, shale resources, coal bed methane and foreign petroleum assets, lacked technical expertise’ (Times of India, 14 August 2013). The PTI report mentioned that coal-bed methane and shale gas had already been transferred to the joint secretary, international cooperation and gas pricing.
and administrative matters related to ...(ONGC Videsh) and unconventional hydrocarbons’ through a note signed on 6 August by Veerappa Moily. Aramane was left with the exploration portfolio, his other charges being handed over to the joint secretary, international cooperation and gas pricing, P.K. Singh. The gas pricing on NELP blocks such as RIL’s KG D-6 block was with Aramane, who had held this portfolio from the period when Jaipal Reddy was petroleum minister. Thus, Moily had the perfect cover for his argument that this realignment was about lessening the officer’s burden (PTI, 5 August 2013). The national news agency reported how the petroleum minister ‘temporarily’ held back the transfer on account of a ‘rethink’ since the ministry had to ‘file an affidavit in Supreme Court on a petition challenging the 27 June decision of the Cabinet to raise gas prices’. With Aramane having piloted the move, it was decided that the function remained with him, ‘at least’ till the affidavit was filed, which had to be done by 6 September. Petroleum secretary Vivek Rae, on his part, had stood by the officer which reportedly ‘infuriated Moily’ as he had returned the file to the minister ‘saying the new person who would handle gas pricing, shale resources, coal bed methane and foreign petroleum assets, lacked technical expertise’ (Times of India, 14 August 2013). The PTI report mentioned that coal-bed methane and shale gas had already been transferred to the joint secretary, international cooperation and gas pricing. six-page note (excluding three annexures), had written to secretary Vivek Rae on 15 April stating that out of the 19 oil and gas discoveries claimed by RIL, three finds had not been established as commercially viable in absence of test data and the company has not submitted any investment plans for another five finds. He recommended that the petroleum ministry ‘may intimate the contractor (RIL) about cessation of (the operation of its) Petroleum Exploration License in respect of 6,601 sq km of contract area [of the total area of 7,645 sq km] in the first instance in the block KG-DWN-98/3 under Article 3.11 of (the) PSC’.
An angry Gurudas Dasgupta accused Moily of divesting Choubey of some of his duties since the officer took decisions against RIL. He also wrote to the Prime Minister protesting the move. In defence Moily retorted dramatically: ‘I am telling you again and again, our conscience is very clear. We have not taken any decision to respond to anybody’s needs. (If there is) even an iota of evidence, let them show, I will not be there the next day in this seat’ (PTI, 13 August 2013). The two continued to spar.
A report in the Mint (14 August 2013) provides a flavour of these acrimonious comments. Without naming the CPI MP, petroleum minister Moily accused Dasgupta of pandering to Chinese interests, adding that a day after India had raised the price of natural gas to $6.83 per mBtu, China had hiked its price to $9 per unit. Dasgupta, of course, squarely blamed the ministry headed by Moily of ‘working to give fabulous benefits to a particular corporate house’. The minister was especially prickly on the question of leaks of documents from the ministry. He grumbled that each time ‘his ministry considered a change, the relevant papers were leaked’. He added: ‘I don
’t know how propriety demands that Cabinet papers come in the hands of Gurudas Dasgupta. This is a very serious matter where government papers are being leaked.’
While the petroleum ministry kept rolling around key government officials, concerned citizens were raising the gas pricing issue in the public interest. In his communication to the minister asking that Aramane retain the gas pricing portfolio, petroleum secretary Rae also indicated that that the price hike was ‘still under examination’ alluding to a PIL filed by Dasgupta on 29 July. There was widespread speculation that the PIL was the reason for Moily’s rapid moves. Amitav Ranjan, writing in the Financial Express (14 August 2013) indicated that Moily ‘justified his August 6 notings’ on Aramane’s removal by ‘putting on record that Giridhar (Aramane) was responsible for document leakages from the ministry’.
While Moily defended his decision, activists like former civil servant E.A.S. Sarma, upset that an honest and performing officer was being pilloried, complained to the CVC through a letter dated 13 August. Sarma asked the CVC to investigate alleged favours shown to Reliance by the petroleum minister, and enclosed five news reports to show instances of ‘possible conflict of interest’ between Moily in his early avatar as minister of corporate affairs and subsequently as petroleum minister ‘in so far as corporate interests’ were concerned. His letter pointed out that the Moily family controlled an entity called Kisan Sabha Trust that had received funds from the corporate social responsibility (CSR) budget of cigarette, hotels and consumer goods major ITC (formerly India Tobacco Company) Limited in 2012 for five years. Among other reports, Sarma cited an article by J. Gopikrishnan of the Pioneer dated 18 March which quoted a letter written by the minister’s son Harsha Moily to a business associate Sudir P. (or Sudhir K. Prabhu) saying that ‘dad (meaning Veerappa Moily) had just called and confirmed’ that ITC had approved the funding of the trust and that necessary bills would have to be furnished for the corporate body to process payments.